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Formation of new Regional Integration Agreements (RIAs)

Formation of new Regional Integration Agreements (RIAs). *Source: WTO; Note: Inactive data for years 2000-2002 are not available. Types of RIA. By increasing order of integration: Preferential Trading Agreements (PTAs): give preferential access to partners without eliminating all barriers

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Formation of new Regional Integration Agreements (RIAs)

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  1. Formation of new Regional Integration Agreements (RIAs) *Source: WTO; Note: Inactive data for years 2000-2002 are not available.

  2. Types of RIA • By increasing order of integration: • Preferential Trading Agreements (PTAs): give preferential access to partners without eliminating all barriers • Free-Trade Areas (FTAs): eliminate internal tariffs to trade but leave members free to fix their external tariffs as they wish • Governed by GATT Article XXIV • Require the use of Rules of Origin (ROOs) • Customs Unions (CUs): eliminate internal tariffs to trade and adopt a Common External Tariff (CET) • Single/Common Market: eliminate all internal barriers, direct or indirect, harmonize not just external trade policy but also regulations and standards • Economic Union: in addition, adopt a common currency and harmonize macroeconomic policy

  3. SADC IOC Congo, R.D. Angola Mauritius Mozambique Burundi Comoros Madagascar Botwana Zambia Seychelles Lesotho Swaziland Tanzania Zimbabwe Kenya South Africa Namibia Malawi Rwanda Uganda SACU RIFF Djibouti Sudan Eritrea Ethiopia COMESA The spaghetti bowl---An example: East and South Africa

  4. home production competes with imports from B and C imports Country C Country B Country A FTA imports Trade creation and trade diversion: trade pattern

  5. Trade creation and trade diversion: numerical example Imports from partner displace inefficient domestic production Imports from partner displace efficient imports from rest of the world

  6. Trade creation and trade diversion: gravity estimates trade creation trade diversion Source: Carrère (2004)

  7. Effect of RIA on the price of non-member exports MERCOSUR’s formation US export prices compared, Brazil vs ROW

  8. Other effects of RIAs: Income convergence Convergence during reduction in trade barriers Dispersion of per-capita incomes in the EC

  9. RTAs can also provide insurance against partners’ unilateralism: Comment by political scientist Dan Drezner on Hillary Clinton’s proposal to review NAFTA every 5 years, posted (October 18, 2007) on Dani Rodrik’s blog: “Last week, [Senator Clinton proposed] that we reassess our trade agreements every five years and demand adjustments to them if necessary, starting with NAFTA. “This proposal makes me wonder if Senator Clinton understands the value-added of these free-trade agreements. […] They offer a guarantee to these countries that their relationship with the United States -- and their access to American consumers -- will not be disrupted. “[…] Senator Clinton's proposal would strip these agreements of the very certainty that makes them attractive to our allies. How does Senator Clinton think our trading partners in the Middle East, Central America, and Pacific Rim will react to her proposal? How is this proposal any different from the unilateralism that Democrats have condemned for the past six years?‘”

  10. The effect we are trying to identify (simulated data) No agreement: Volatility of trade policy vis-à-vis country 1 (MFN partner, y1) and country 2 (preferential partner, y2) in the absence of any agreement

  11. RTA: Border taxes are reduced during the transition period and completely eliminated at its end vis-à-vis country 2 (y2) MFN: No volatility-reducing effect on MFN trade measures (y1) Effect of transition on aggregate volatility is swamped by volatility in MFN measures [σ(y1)]

  12. Results: baseline, second stage Bias: countries sign RTAs when they have too much volatility

  13. Results: baseline, second stage Bias: countries sign RTAs when they have too much volatility

  14. Other effects of RIAs: FDI Launch of NAFTA negotiations NAFTA put into force Amount of FDI into Mexico, million dollars

  15. Vertical trade at work: Garment export growth, SSAClothing exports to the US, selected ESA countries Notes AGOA: US Africa Growth and Opportunity Act, voted in 2001, gives duty-free access to African LSCs HS61-62: Clothing categories in the customs Harmonized System Source: Cadot et al 2004

  16. Garment export growth: MadagascarExport-led growth: clothing products Source: Nicita 2004

  17. 17. Transport Eq. 7. PLastics 20. Misc. NAFTA utilization rate 1 18. Optics 2 12. Footwear 10 15 Base metal 5 6. Chemicals 16 13. Stone & Glass 11. Textile 4. Food. Be. & Tobacco 9. Wood 3. Fats and Oils 8. Leather goods 1. Live animals 2. Vegetables 5. Mineral Products 10. Pulp & paper 16. Machinery &El.eq 19. Arms 14. Jewelry Tariff Preference Rules of origin Mexico’s utilization of NAFTA, 2000, by HS section 5% tariff preference 10% tariff preference Note: NAFTA utilization rate: proportion of Mexican shipments entering the US under NAFTA’s preferential regime (as opposed to MFN)

  18. Rules of origin Mexico’s exports in ROO/tariff preference space Note: ROO index: Estevadeordal’s (2000) qualitative index of ROO restrictiveness (essentially how wide is the required change of tariff heading to make imports eligible)

  19. 01 Chapter: Live animals 0101 Heading: Iive horses, asses, mulles and hinnies 0102 Heading: Live bovine animals 0103 Heading: Live Swine 0104 Heading: Live sheep and coats 0105 Heading: Live poultry 010110 Subheading: Purebred breeding animals 010190 Subheading: Others 01011010 Item: Males 01011020 Item: Females 01019010 Item: Horses 01019020 Item: Asses The “Harmonized system”: Overall structure

  20. Product-Specific Rules of origin: Examples Exceptions

  21. Product-Specific Rules of origin: Examples Funny Technical requirements NAFTA Cotonou Convention (EU)

  22. Rules of origin Why they hurt: “slicing up the value chain” becomes more difficult Tunisia Comparative advantage Infrastructure-intensive Cotton production Labor-intensive Ginning Spinning Weaving Dying Cutting Assembly Shipping Retailing Natural-resource intensive Capital-intensive

  23. Rules of origin Pass-through of tariff preferences: the principle US market Price Potential increase in Mexican producer price Mexican post-tariff supply price Mexican pre-tariff supply price US internal price = World price + US MFN tariff Tariff preference Preferential tariff World price US demand Quantity • Assumptions • No US production • Mexican producers perfectly competitive • Market power on the US buyer side, so Δt captured only partially by Mexicans Potential increase in Mexican supply

  24. Rules of origin Pass-through of preferences: NAFTA Source: Cadot et al. (2004)

  25. Rules of origin Pass-through of preferences: NAFTA < roo0 US consumer market US intermediate producer US NAFTA tariff on blue & red socks Mexico’s NAFTA tariff on fabric ai2 ai1 Rest of the world < roo1 Mexican final good 1 < roo2 Mexican final good 2 Mexico’s external tariff

  26. Rules of origin Pass-through of preferences: NAFTA significant not significant significant Source: Cadot et al. (2004)

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